Updated on 11.14.07

52 Books, 52 Weeks: 10 Fundamental Personal Finance Ideas

Trent Hamm

As I read personal finance book after personal finance book over the last year, I came to realize that a lot of concepts in various books were exactly the same. In fact, there were a handful that were mentioned in a majority of the books, which would indicate something close to a universal truth about personal finance management.

I went through the notes I collected on all of the books and tried to filter out the ten universal truths about personal finance shared by a large number of the books. Here’s what I found.

Spend less than you earn. This is the number one key, and it shows up again and again in almost every personal finance book that I read. You are never going to get ahead if you spend as much as you earn or more than you earn over any lengthy period of time.

Sit down with all of your accounts and figure out where you’re at. Every day you don’t have control over all of your accounts and can’t really estimate how bad the situation is is another day you’re going to be chained to your job and worried at night about it. Spend the time to sit down, spread everything out, and figure up your total financial picture. There are a lot of different ways to do this – I think that just listing every account you’re aware of (and the balance of that account) is the best way to get started.

Set small and big goals. Small goals are ones like commitments to not spend any extra money this week. Big ones are goals such as paying off all of your debts. State the goals clearly and effectively, and keep track of your progress towards these goals so that you’re constantly in the fold of something bigger than the minutiae of your day to day life.

Get a small emergency fund before you do anything else… The first step in any financial turnaround, once you’ve stopped spending more than you make, is to build up a small emergency fund so that you don’t have to put a minor crisis (like car issues, for example) on your credit card. $1,000 is a pretty common target number.

… then eliminate all of your high interest debt. After you have a small emergency fund, start dealing with your high interest debt immediately. There are differing opinions on how to do this, but the general consensus is you should start with either the highest interest debt (fastest route to recovery if you’re committed) or the smallest balance debt (provides success of some debt elimination the fastest).

Check your credit score regularly to make sure nothing bogus shows up. Go straight to annualcreditreport.com to get your report via the FTC. Don’t use other sources, like freecreditreport.com, which act as a middleman and tack on extra stuff for the same service.

Put at least 15% away for retirement (including what your employer matches). Some books say to put away 10%, but they often mention in the fine print that they’re not including employee matching in that number. Generally, to be on the safe side, you should be putting away at least 15% into your 401(k) and/or your Roth IRA.

Automate what you’re doing. If you’re investing, automate the investments and have a certain amount moved over from your checking each month. If you’re saving for a goal, automate transfers into your savings account. Automate as many of your bill payments as you can. The less you have to remember and encourage yourself to do, the better – plus, it takes extra effort to not do it once you’ve set it up.

Similarly, always look for ways to reduce your required spending each month/year. Any method you can find to reduce your monthly bills is incredibly worthwhile. Even simple things, like swapping your light bulbs for CFLs, buying EnergyStar appliances, and canceling some of the unused options on your cell phone plan and your cable plan, will really add up over time.

Invest extra money into low-cost broad-based index funds unless you have tons of time to do research. Almost a majority of the books indicated that this is by far the best way to invest. Just buy some Vanguard or Fidelity index funds and sit on them until you have a need for the money. Better yet, keep buying in regularly in an automatic fashion. If you have a ton of time for research and homework, you can make somewhat better money in individual stocks, but they’re riskier and require much more time investment.

These are the nutshell ideas behind many of the books I read, and these ideas usually pop up in some form in almost every single personal finance book. Why? They’re universal truths – or at least as close to truths as you’ll find in the world of personal finance.

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  1. Writers Coin says:

    This should really be the starting point for anyone beginning to really get into the financial domain.

  2. Ron says:

    Good tips. People tend to forget things that also really add up. For example, you save and save for your children’s college education, do you save for their $7,000 braces on their teeth, or their (minimum) $10,000 wedding? What about their first vehicle and the ensuing rise in your insurance rate? How about for your 10th or 15th (or in my case) 20th year wedding anniversary? My wife wants an exotic trip for putting up with me for all these years.

    I wish I had thought through many of these a looooong time ago. Maybe a few less lattes and a whole lot more savin’

  3. Peter says:

    The problem with the basics, is always, that they are basic, which translates into boring and not flashy. But that’s where you need to start, and that’s what you need to go back to periodically to reassess and ensure you’re still on track with your short and long term goals.

  4. LC says:

    Ron has a good point about saving for things you might not think about, but no wedding has to (or should, in my opinion) cost $10,000. I know that is far less than the US average, but I had a nice wedding and full catered dinner for 200 for less than $5,000, including a week long honeymoon.

    This is a long way off for me, but I think that a good idea for a kid’s first vehicle would be to get a real cheap car and fix it up together. You can save money (on the car and insurance), spend time together, and learn some automotive knowledge that will teach them how to be more self reliant when it comes to repairs later on.

    I think that these tips are pretty accurate, and it just reinforces them when you hear them from so many experts.

  5. Mrs. Micah says:

    Those sound like the best tips from the (many fewer) PF books I’ve read.

  6. This is an awesome set of ‘universal truths’!

    I would add: invest early! Compound interest is our friend!

  7. jtimberman says:

    “then eliminate all of your high interest debt”

    This should probably be rephrased to “eliminate debt with a debt snowball. Use the method that gets you to change behaviour and encourage you with good results.”

    “Check your credit score regularly to make sure nothing bogus shows up.”

    Do this three times a year from each of the credit reporting agencies, every four months, rather than all three at once.

    Though I think the number one fundamental ‘idea’ is to do a budget, every single month on paper. This is alluded to with some of these ideas you’ve listed, but it really does stand on its own. Writing down all our spending every single month over the last three and a half years is how we were able to win at the debt snowball. When we first got married, we knew I made good money, but we spent it like crazy without planning. After we started budgeting it every month, we realised that I made *really* good money, and we were able to make it work better for us and our goals.

    Do a budget. Every month. On purpose. Only then will you even begin to win at personal finance.

  8. Katy says:

    Roth IRA’s are great if you can pay the taxes each year! That would be a real hardship for a low wage earner. So I have a traditional IRA.

    Cash is king.

  9. Deb C says:

    My husband has 10% taken out of his weekly check with matching funds by his employer. However, the funds are dogs dictated by his employer. Is it still worthwhile to do this? Wouldn’t he be better off to put his money in index funds without the matching contribution? Thanks.

  10. Andrew G says:

    LC: You make an excellent point regarding weddings costing around $5,000 (my wife and I hit $6,500). However, keep in mind that inflation pays a part… especially when considering something that is 18 years (or more away)… even at a low inflation rate of 2.25%… is right around 10,000 in 30 years and in the neighborhood of 10k after only 18 years if inflation tips back up to around 4%.

  11. Jerry says:

    Two points:

    Trent: What are your thoughts on low cost target year retirement funds rather than low cost broad based index funds? For those who do not know, the target retirement funds include a low cost broad based stock index fund, a bond fund, and usually some international stocks. This mix is adjusted each year, gradually lowering the stocks in favor of bonds, so that when you retire you have about 50% stocks.

    Deb C: Everything I have read says that you should at least invest enough in a company retirement plan to get the company match. Otherwise, unless it’s a truly terrible plan, you’re missing out on free money. You need to look at the big picture, not any one expense or return. Do the math yourselves at home.
    Company plan 5 year average return % + % match – fund % expense ratio – fund fees = net return
    Low cost mutual fund 5 year average return % – fund % expense ratio – fund fees = net return
    At worst, you might come out ahead by investing only enough to get the full match, then put the rest into the low cost index fund.

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